Dynamic interactions between stock and foreign exchange markets

This paper investigates the interdependence of stock price changes and exchange rate changes. More specifically, it examines the impact of past currency appreciations and depreciations on the price as well as the volatility of stocks. Similarly, it investigates the influence of past stock price changes on the value as well as the volatility of the domestic currency. The joint distribution of stock returns and exchange rate changes is described by a multivariate EGARCH-M model that utilises the multivariate Student-t density function. This extension of Nelson's (1991) univariate EGARCH-M model is quite general in the sense that it captures both first and second moment interdependencies. Moreover, it provides a flexible vehicle for the investigation of such an important issue as the pricing of conditional exchange rate risk in the stock market.